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A Segmented Markets Model of Inflation

Author

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  • Browne, Frank

    (Central Bank and Financial Services Authority of Ireland)

  • Cronin, David

    (Central Bank and Financial Services Authority of Ireland)

Abstract

Models of inflation usually have monetary policy impacting the economy through either an interest rate or a monetary/credit quantity channel but not through both. We argue that policy is transmitted via two distinct types of agents – those that are and that are not liquidity constrained. The implication is that both channels must be seen as complementary, joint indicators of inflation and must both be incorporated in models of inflation. We provide a formal representation of price level determination and behaviour in this segmented markets framework and evaluate it econometrically using US data. Length: 32 pages

Suggested Citation

  • Browne, Frank & Cronin, David, 2006. "A Segmented Markets Model of Inflation," Research Technical Papers 17/RT/06, Central Bank of Ireland.
  • Handle: RePEc:cbi:wpaper:17/rt/06
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    File URL: https://centralbank.ie/docs/default-source/publications/research-technical-papers/17rt06---a-segmented-markets-model-of-inflation-(browne-and-cronin).pdf?sfvrsn=6
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    References listed on IDEAS

    as
    1. Neiss, Katharine S. & Nelson, Edward, 2003. "The Real-Interest-Rate Gap As An Inflation Indicator," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 239-262, April.
    2. repec:fth:harver:1466 is not listed on IDEAS
    3. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-858, September.
    4. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    5. Fernando Alvarez & Robert E. Lucas & Warren E. Weber, 2001. "Interest Rates and Inflation," American Economic Review, American Economic Association, vol. 91(2), pages 219-225, May.
    6. Rotemberg, Julio J, 1984. "A Monetary Equilibrium Model with Transactions Costs," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 40-58, February.
    7. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
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